I have throughout the years, discussed the need for more fiduciary responsibility from the plan sponsor and the company itself in the crucial steps an employee takes on the road to retirement. Admittedly, the whole scheme behind a 401(k) is to cost as little to the employer as possible to operate and for the plan sponsor, to generate just the right amount of fees for their services as to not seem excessive.
That sounds harsh but if you explore the outcry to a proposal from the U.S. Department of Labor to offer the investor in these long-range plans a much clearer look inside, Wall Street cried foul the loudest. This is in large part due to their bias in the process. They sell products of the financial type and this sort of rule change would have a direct effect on business as usual.
And who can blame them. There is an enormous amount of money at stake. Some of these products generate a great deal of money for the firm, who is in charge of providing the investor a good selection of investment choices, all priced so they enhance the retirement fund’s eventual ending balance.
But, hey, this is capitalism and Wall Street believes you already understand buyer beware. What Wall Street ignores is the simple fact that in a 401(k), we have only one store to shop.
This is an excellent idea by the Middle Class Task Force. We should be able to see what is happening inside our retirement accounts, be they 410(k), IRA or pension. Although some improvements have been made to how these plans report what they do over the years, there is still a bias at play and the slightly less educated investor – and this makes up what might be called a vast majority, still doesn’t understand how it all works. That is a definite advantage for the financial firm.
And although the intentions are good, the results of the rule change may not have the desired effect.
First reason: The whole idea behind a 401(k) was never clearly explained to the business who offers it. They understood the company match could lure and keep good employees. But that was about as far as it went. Understanding that the 401(k) was more than a recruitment tool never caught on. If it was cheap and folks seem to use it, everything was fine.
The second reason is a knee jerk reaction to the first. If it is going to get cheap, the inventory of funds would have to be whittled down to the least expensive: the index fund. Now folks who believe in no other kind of investment will do as well over the long term, will rejoice at this news. But the truth is, the portfolio is more likely to be offering less actively managed funds and more target date funds.
The third reason is that the folks who realize they need investment advice waited too long to get it. And the folks who didn’t take the advice, bought target date funds in the hope that they would be in the investment that would require the least amount of effort.
The fourth reason could have been solved by the company getting more involved. The rush away from the pension to the 401(k) saved billions in costs. Little of that savings was channeled back into the employee either in wages or benefits.
And the fifth reason lies in the 38 year old, who according to Hewitt Associates survey of 400,000 investors, found that this (average 38 year old) participant was enrolled in a target-date fund. The report also showed that this persons plan balance was only $6,295. Defending the need for advice, Pamela Hess, Hewitt’s director of retirement research suggested “Enrollment in managed accounts increases as workers near retirement because these employees have more complex and individualized needs”.
So, to answer the question of whether an adviser could help you with your 401(k) is a resounding yes. Yet, how they have gone about it to date, leaves much to be desired. Yes there are increased costs. But as long as these costs are always front and center in the conversation, participants will be under-invested or invested too conservatively to get the upper hand they need early enough to matter.
Worries over whether these plan sponsors are leading the average investor down the path of the highest profitability for the firm and the lowest cost for the employer are well founded. And as long as this mindset stays in place, the regulation will have to come in the form of actions such as those by the President’s Task Force.
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